Back in 2011, PIMCO’s Bill Gross was having a rough go of things. Specifically, he missed a huge rally in the Treasury market, which meant his Total Return (MUTF:PTTAX) fund scored only a 3.7% return — well behind the category’s average return of nearly 6%.
But of course, it was just a temporary problem for the “Bond King,” and Gross got back to his winning ways. Over the past year, PTTAX has returned to its industry-beating ways, posting a nearly 8% return compared to the average of 5.8%.
So, can Gross keep finding opportunities to generate standout returns, and thus, should you hop onto PIMCO Total Return? To see, let’s take a look at the pros and cons:
Management: Gross is a bond legend, and few managers have his experience and background — namely, he’s been running PTTAX since 1971. Gross also has a knack for consistency; PTTAX has generated an average gain of 6.7% in the past 15 years, compared to a category average of 5.4%. However, Gross also has assembled a top-notch team of investors and analysts at PIMCO whose expertise occasionally spills over into PTTAX decisions.
Diverse Portfolio: PIMCO has offices across the world, which has proved helpful in seeking out unique investment opportunities. To this end, PTTAX has benefited by getting exposure to attractive bonds in emerging markets. This global approach also has been useful in avoiding problems, as was the case with southern Europe, from which Gross has shied away.
Derivatives: These include investments like futures, options and forward contracts. It’s true that they can be risky — they almost destroyed companies like AIG (NYSE:AIG) and even Goldman Sachs (NYSE:GS) — but these vehicles can be be extremely useful. PTTAX has a long history of using derivatives to not only generate extra returns, but also to reduce some of the risk in the portfolio. This kind of expertise will likely prove to be a differentiator, especially as markets remain volatile.
Interest Rate Risk: This is perhaps the biggest risk for PTTAX — or for any bond fund, for that matter. When interest rates increase, the value of the bonds fall. While there are ways to help hedge this risk, the approaches are neither bulletproof nor cheap. With interest rates already at historical lows, the possibility of a hike is certainly real, and the Federal Reserve already has given some hints toward this end.
Trading: Gross likes to trade, and that shows up in a whopping 584% turnover ratio. Yes, he can make huge plays, shifting from one type of asset class to another or even going short, and in a low-yield environment (PTTAX’s yield is a mere 0.95%), a bond manager needs to be opportunistic. But aggressive trading can be risky, as just a few bad bets can wreck a portfolio.
Credit Risk: This is when the quality of a bond investment is fairly shaky; it’s usually the case with vehicles like nonagency mortgages and junk bonds. Gross has invested in these, but he has had little choice, as it’s these kinds of investments that have the potential for higher returns. But if the economy weakens, there could be big drops in the values of these securities.
Again, the biggest risk for PTTAX is a rise in interest rates. But the timing is nearly impossible to gauge, and interest rates could remain at low levels for many years (see: Japan).
All in all, it’s good to have some exposure to bonds, as they provide more consistent returns over the long-term and with lower risks than stocks. And PTTAX — with its elite management — is a great choice.
So should you buy PIMCO Total Return? Yes — for now, the pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.